S&P Global Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2022. S&P Global provides credit ratings, benchmarks, data, analytics and workflow solutions. Its six reportable segments are Market Intelligence, Ratings, Commodity Insights, Mobility, Indices and Engineering Solutions.
The February 28, 2022 all-stock acquisition of IHS Markit materially changed the company’s size and segment mix. 2022 results include IHS Markit only from the acquisition date, so reported year-over-year comparisons are not directly like-for-like. Interim financial statements were reviewed by the independent accountant, not audited.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2.861 billion | $2.087 billion | $8.244 billion | $6.209 billion |
| Operating profit | $853 million | $1.083 billion | $4.228 billion | $3.317 billion |
| Operating margin | 30% | 52% | 51% | 53% |
| Net income attributable to S&P Global | $608 million | $797 million | $2.815 billion | $2.349 billion |
| Diluted EPS | $1.84 | $3.30 | $8.91 | $9.72 |
| Cash provided by operating activities | Not provided by quarter | Not provided by quarter | $1.490 billion | $2.658 billion |
| Free cash flow (non-GAAP) | Not provided by quarter | Not provided by quarter | $1.232 billion | $2.454 billion |
At September 30, 2022, cash and cash equivalents were $1.387 billion; total debt was $10.786 billion, including $52 million short-term and $10.734 billion long-term. Cash was $6.497 billion and debt $4.114 billion at December 31, 2021. The company had a $2.0 billion revolving credit facility, no commercial paper outstanding, and stated that available cash, operating cash flow and credit capacity should cover operating and recurring needs into the foreseeable future. The credit facility’s leverage covenant limit is 4:1; the company said it had never exceeded it.
Material changes versus comparable periods
- Reported revenue rose 37% in Q3 and 33% for the nine-month period, primarily reflecting the IHS Markit acquisition. On a supplemental pro forma basis assuming the merger occurred January 1, 2021, revenue was $2.862 billion versus $3.109 billion in Q3 and $8.905 billion versus $9.244 billion for nine months.
- Reported Q3 operating profit fell 21% and nine-month operating profit rose 27%. The nine-month result included $1.897 billion of net gains on dispositions; management said operating profit increased 11% excluding specified unusual items, including that gain, higher merger costs, amortization, severance and a foundation grant.
- Ratings weakened: Q3 revenue fell 33%, including a 56% decline in transaction revenue; nine-month revenue fell 25%. Management attributed this mainly to lower corporate and bank-loan issuance, including sharply lower high-yield and structured-credit activity.
- Subscription revenue was $1.682 billion in Q3, up from $824 million, and $4.490 billion for nine months, up from $2.409 billion. Non-subscription/transaction revenue declined 31% in Q3 and 22% for nine months.
- Nine-month operating cash flow fell 44% and free cash flow fell 50%. The company cited weaker operating cash generation, merger costs, taxes on divestitures and a $200 million S&P Global Foundation grant. Investing cash flow was positive $3.689 billion, chiefly from business-sale proceeds.
Outlook, management commentary, risks and unusual items
- No quantitative earnings or revenue guidance is provided in the supplied filing text. Management’s stated priorities include realizing merger synergies, growing organic revenue, investing in areas such as ESG and energy transition, and completing integration projects; success is not assured.
- Major divestitures generated $1.897 billion in net pre-tax gains for the nine months. The sales included CUSIP Global Services for $1.925 billion, OPIS for $1.150 billion, LCD and related indices for $600 million plus a contingent payment of up to $50 million, and Base Chemicals for $295 million.
- Integration-related costs were significant: $523 million of IHS Markit merger costs, $186 million of restructuring charges, and $645 million of intangible amortization were recorded for the nine months. The acquisition purchase-price allocation remained preliminary, particularly for acquired intangibles, deferred taxes and goodwill; further measurement-period adjustments could be material.
- The company repurchased 29.5 million shares for $11.0 billion in the first nine months, funded in part through debt issuance and disposition proceeds. It increased the quarterly dividend from $0.77 to $0.85 per share beginning in Q2.
- Management identified macroeconomic and credit-market weakness, foreign-exchange movements, merger integration and synergy execution, cybersecurity and data risks, and regulatory and litigation outcomes as risks. Russia and Belarus operations were suspended in March 2022; the company said the impact had not been material to results to date.
- Legal and regulatory matters include an ongoing SEC inquiry concerning a 2017 Ratings analysis and Australian litigation relating to pre-financial-crisis collateralized debt obligations. The company said outcomes and potential losses are uncertain and cannot generally be estimated; it did not expect the SEC matter to have a material adverse effect based on discussions to date.
- Operating lease impairments were $98 million for nine months, mainly tied to reduced anticipated sublease income and post-merger office consolidation. The company also disclosed limited Iran-related information transactions; Commodity Insights recorded no revenue or net profit from the described dealings in Q3.
Important facts for investors to verify
- Assess underlying organic and pro forma growth separately from acquisition-driven reported growth, and monitor progress on integration and synergy targets.
- Track Ratings issuance volumes and transaction revenue, along with recurring subscription trends across the acquired and legacy businesses.
- Reconcile earnings and margins for divestiture gains, acquired-intangible amortization, merger and restructuring costs, and the foundation grant.
- Monitor debt, interest expense, cash generation and capital returns following the $11.0 billion share repurchase program and the increase in debt.
- Follow the final IHS Markit purchase-price allocation, merger-related contingencies, SEC inquiry and Australian litigation developments.